Juncture interview: Adair Turner

In a wide-ranging interview, former FSA chair Adair Turner addresses the political risks associated with ‘People’s QE’ and other forms of – traditionally ‘taboo’ – overt money finance, the necessary shape of policy responses to inequality, the orthodoxies of academic economics, and the cultural aspects of debt.

Lord Adair Turner became chairman of Britain’s Financial Services Authority (FSA) days after Lehman Brothers collapsed in 2008, and he played a leading role thereafter in redesigning global financial regulation.

His new book, Between Debt and the Devil (Princeton University Press, 2015), challenges the beliefs that we need credit growth to fuel economic growth and that rising debt is okay as long as inflation remains low. He argues that public policy needs to manage the growth and allocation of credit creation, and that debt should be taxed as a form of economic pollution. He also tackles the taboos around fiat money – arguing that, in order to escape the mess created by past policy errors, we will sometimes need to monetise government debt and finance fiscal deficits with central bank money.

Adair Turner was interviewed for Juncture by Josh Goodman, director of research at IPPR.

Josh Goodman: I’d like to start with the ‘acknowledgments’ section of your book. You thank colleagues at the FSA who, in your words, had to put up with your musings on fundamental causes and theory even as you were struggling with day-to-day management of the financial crisis. That’s a colourful image. Can you describe how your intellectual views developed in the midst of chaos?

Adair Turner: Well that was a deliberately self-deprecating comment and I hope it doesn’t imply I was ever not focussed on the immediate priorities! But certainly from quite an early stage, probably even in autumn 2008, but certainly by spring 2009, I was worried that our standard explanations of what had gone wrong didn’t go deep enough.

In particular, I began to think about what credit is used for in the economy. Even after the crisis, there was a very strong tendency for regulators, central bankers and economists to assume that credit creation was, by definition, a good thing. For instance, my book quotes a discussion I had with FSA staff experts in autumn 2008, about whether we should place any restrictions on credit default swaps. And I remember them saying, ‘Adair, we’ve got to be cautious here because reduced liquidity in the CDS [credit default swaps] market will make it more difficult to create credit to lend to the real economy.’ But even at that fairly early stage I began to ask the question, ‘Yes, but is more lending to the real economy necessarily a good thing?’

There was a dominant, conventional wisdom which essentially defined the problem as – ‘Something has gone wrong with the credit creation process; that has produced a credit crunch, so that we don’t have enough credit being extended; so we must fix that to ensure more credit coming into the economy’ – but without ever going back to the fundamental question of how much credit, and therefore how much debt, and of what category, is good for the economy.

JG: Your book is very forceful on the dangers posed by spiralling creation of private debts. You stop short, though, of saying we should force banks to have 100-per-cent reserves, because you say there is still some useful role for private debt creation. How will we know what the right level is? Many of your charts show debt spiralling after about 1970 – so should we be returning to that level, or to some other level?

AT: I don’t know the optimal level of private debt. I’m completely convinced, as are an increasing number of economists, that there is a level of private leverage beyond which more debt is harmful. So we have to think about the functional relationship between credit creation and the efficiency of the economy not as a linear and limitless relationship but as an ‘inverse U’. There are, I believe, very strong theoretical and empirical arguments for that proposition.

But I think we’re in the very early days of thinking through what the optimal level is. And it’s almost certainly a very complex function, which will vary for different economies in different conditions.

For instance, we can’t answer the question ‘what is the optimal level of private leverage?’ without simultaneously looking at public leverage, because if government debt was very low we could be more relaxed about rising private leverage, and vice versa. So the analysis which economists such as Steve Cecchetti (formerly of the Bank of International Settlements) have begun into the optimal level of private leverage needs to be integrated with Reinhart and Rogoff’s analysis of what level of public leverage is too much.

And maximum beneficial leverage will also depend on the future potential sustainable growth rate, given demography and productivity. Britain came out of world war two with very high public debts – over 200 per cent of GDP – but public leverage fell dramatically over the subsequent 30 years, because the economy grew at close to 3 per cent per annum. But if, given technological potential and demographic trends, maximum sustainable growth is, say, 1 per cent per annum – the position in Japan today – then the potential to grow one’s way out of high leverage is greatly reduced.

An interesting OECD report on this, produced in July 2015 – just soon enough for me to add a footnote reference to it in my book – suggests that the point at which the ‘inverted U’ turns negative could be as low as private leverage of 90 per cent of GDP, for household and corporate debt combined. Cecchetti was playing around with figures closer to about 90 per cent separately for household and corporate debt.

JG: You make a powerful case for greater use of fiat money to get out of our current debt overhang, through any of a variety of means: helicopter drops, public debt write-offs or funded bank recaps. Do you think the UK should be doing this now? At one point in the book you say that it may now be too late, because growth has returned. But at another point you suggest that the Bank of England could write off some of the gilts it has bought through quantitative easing (or QE).

AT: I certainly think that in 2009 it would have been better if several major central banks had agreed with their governments to do simultaneous ‘helicopter money drops’ – increased fiscal expenditures or tax cuts overtly funded by permanent money creation – precisely as Ben Bernanke suggested Japan should do in 2003.

And I think if we had done some of that – and somewhat less classic, and supposedly reversible, QE – we would now have a slightly higher price level, slightly higher levels of real output, lower debt levels as a proportion of GDP, and higher interest rates. We would be further along the path of recovery, and closer to a return to normal interest rates.

But in the UK today we may in any case soon start seeing nominal GDP growing at an acceptable level. And in deciding on optimal macroeconomic policy, the first question you should always ask is, ‘Are we in conditions where we should seek to stimulate nominal GDP through any mechanism?’ And it’s not clear that that is currently the case in the UK – which is why the Bank of England is not currently discussing an increase in QE.

If, however, we returned to a position where, in order to have adequate growth in nominal GDP, the Bank of England was discussing the need for more QE, I might well then argue for a helicopter money drop rather than more QE. But if we are not clearly in that position now – and I’m not sure we are – then maybe we leave this option aside for now.

In Japan, however, there is going to be and should be overt permanent financing of government fiscal deficits. Increasingly it will become obvious that Japan simply cannot pay back its government debt. And there are going to be debates this autumn about whether the Bank of Japan should increase its QE programme. But I would argue very strongly that it should not increase its QE programme in a classic sense, but instead increase the fiscal deficit and fund it with central bank money.

JG: As you say many times in the book, the most common counterargument against fiat money is fear of hyperinflation. You give a detailed defence of the possibility of designing an institutional framework that would allow a judicious use of fiat money while avoiding hyperinflation. The core of your defence is that, even though government would have a new and potentially dangerous power, the central bank would still have a veto. Now, that gives a lot of power to unelected technocrats, whom I think you don’t see as having covered themselves in glory in the run-up to the crisis, because they were caught up in the wrong intellectual orthodoxy. How would we be able to avoid their getting caught up in new, misguided orthodoxies?

AT: This takes us to the absolute crux of the issue.

There is no doubt at all that there exist circumstances in which overt money finance [OMF] is, in technical terms, the best strategy: most likely to be effective and least likely to generate financial system risk. And there are no technical reasons whatsoever why, done in an appropriate amount, fiat money creation would lead to hyperinflation. Its impact all depends on the amount.

That’s an incredibly important point, because it gets obfuscated. Indeed, one of the key things that I try to do in the book is to be clear on the technical feasibility. And I have heard from nobody a coherent, logical reason why the moderate and beneficial use of OMF is technically impossible or technically undesirable; all apparent arguments that it is dissolve on close inspection.

Now, let me define clearly what I mean here by ‘technical’ considerations. I mean the factors which would be considered by a wise, benevolent monetary policy committee [MPC] which would always seek to make the right decisions about the appropriate amount of stimulus, and which would always be able to do so free of political pressures. In that imaginary scenario it is absolutely clear that OMF would, in many circumstances, be the best strategy.

So the problem is not technical feasibility – it’s the political economy risks which arise once we recognise that OMF can be a technically feasible and desirable policy tool. But these political economy risks are immensely important, because if we have something which seems, in the short term, like a free lunch, how on earth do we put in place political constraints on governments overusing it?

And indeed if opponents of OMF base their case on this political argument, rather than on confused and phoney technical arguments – and there are a lot of confused technical arguments around – then I entirely respect, understand and at times almost agree with them.

So the crucial question is simply this: can we design a set of political economy constraints – embedded in rules and institutional responsibilities – that leaves us confident we will only use this tool in adequately moderate quantities?

One reason to think we could is that we have managed to take away from chancellors of the exchequer the right to set the interest rate. That was a big example of the political class enacting a self-denying ordinance. After all, 30 or 40 years ago the interest rate was routinely reduced just before the governing party’s annual conference to make the party faithful a bit happier. So, starting in 1992 and reinforced in 1997, with complete political consensus, we said, ‘No, the chancellor shouldn’t set the interest rate. That should be done by an independent expert body – the MPC.’

So if we believe we can enact that self-denying ordinance, why should we not be able to locate the authority to approve the use of fiat money, in pursuit of an adequate level of nominal demand growth, in the same body, the MPC?

Now, if the cost of excluding that option were very slight you might still say, ‘Don’t take the risk.’ But given that the cost of not using OMF could in some circumstances be great, I think we should seek to design appropriate rules and responsibilities to allow its appropriate and disciplined use when it is needed.

To go back to your point about how the technocrats didn’t cover themselves in glory: the one thing that they did do quite well was achieve both a low level of inflation and a moderate and relatively stable growth of nominal GDP. The fatal mistake was to assume that that was sufficient rather than merely necessary, and therefore not to pay attention to the fact that there was a massive increase in private leverage, an increase which did not generate over-rapid growth of nominal GDP but did build up the huge risks which crystallised in 2008.

JG: You present a compelling picture of quite how strong a taboo fiat money is: printing money is associated with Weimar, Zimbabwe and Faust. In practice, how can proponents of fiat money, such as you, go about lifting the taboo? How will you persuade people?

AT: Well, I think that attitudes to policy instruments are sometimes changed because circumstances make it obvious that there is no alternative. And I am certain that in the next five years in Japan we will see policies which amount to the overt permanent monetisation of government debts, without that producing excessive inflation.

The probability that the government of Japan will manage to turn its primary budget deficit into a primary surplus large enough to pay back down its public debt to what is normally considered a sustainable level is zero. Not low – zero. And the probability that at any time in the foreseeable future the Bank of Japan is going to sell back to the market a large proportion of the Japanese government bonds [JGBs] currently on its balance sheet is also zero. So, sometime in the next five years, people will say, ‘Well, okay, either we should make this reality explicit by writing off these debts from the Japanese government to the Bank of Japan, replacing interest-bearing JGBs with a non-interest-bearing accounting entry – or we should recognise that even if we don’t do the accounting, de facto this debt never has to be repaid.’

Because remember that if the Bank of Japan permanently owns JGBs paying very little interest, and permanently returns all the interest income it receives to the government of Japan, then the government of Japan can effectively borrow money perpetually at an interest rate of zero. And perpetual non-interest-bearing government debt is effectively money, even if we don’t call it that.

So I think that over the next five years there will be an increasing recognition that Japan is de facto using money finance. And that realisation will then stimulate debate about how to place money financing within appropriately robust limits and rules. Because once a government starts using de facto monetary finance, it’s more likely to use it well if it explicitly recognises and admits the reality rather than denying it.

Meanwhile, across the whole world, we are a long, long way from getting out of the problems of debt overhang and the resulting environment of ultra-low interest rates. I suspect by 2017/18 we’ll still be looking at UK and US interest rates no higher than 2 per cent or 2.5 per cent. And in many other major economies, central bank interest rates will still be close to zero. So we will increasingly recognise that we have a profound problem of unsustainable debts. And a debate will therefore grow over ‘What are we going to do about those debts?’ Now, there can be a non-monetisation answer to that: you could simply write down the debts. But that’s very difficult to do on a large scale without that itself causing major economic disruption. So interest in fiat money solutions will increase.

JG: One proposal for fiat money that’s received a lot of recent attention among UK commentators is new Labour leader Jeremy Corbyn’s ‘People’s QE’. Do you support his proposal?

AT: I have to admit I haven’t looked at it in great detail. But the challenge facing Jeremy Corbyn in proposing any form of monetary finance is clear: whether he can credibly address the hugely important political economy risks.

As I said earlier, the technical case for treating overt money finance as an available tool to stimulate nominal demand – if and when the conditions make such stimulus appropriate – is incontrovertible. But the political risks of its misuse are huge.

So the legitimate concern is that if monetary finance is proposed by people who come from a strongly socialist tradition – a tradition which has tended to reject the idea of any disciplines on public expenditure – there is a danger in practice that it would be used to excess. That is the concern which Corbyn would have to address.

Paradoxically, the governments best placed to use overt money finance without generating legitimate concerns about its misuse, and without therefore generating harmful market reactions, would be those whose overall commitment to a capitalist market economy is unquestioned. This mirrors the interesting reality that some of the most compelling arguments for using overt money finance of fiscal deficits were put forward by economists – such as Milton Friedman – whose commitment to sound money and low inflation were undoubted.

JG: Even if it were done in a disciplined fashion, is there a danger of people in the markets fearing that it wouldn’t be?

AT: Yes, there are two dangers, and you’re quite right to distinguish them. One is the substantive political economy danger that once a government uses OMF, it is then tempted to use it again in an undisciplined and excessive fashion. The other is that even if the politicians are in fact strongly committed to discipline, the financial markets do not believe them, and that exchange rate movements and changes in inflationary expectations can become self-fulfilling.

Because of the second danger, OMF is most safely done in very large economies rather than small ones. The United States or eurozone could do it with minimal risk of harmful exchange rate or other market reactions, because the exchange rate simply has a relatively small impact on the dynamics of an economy on a continental scale.

But if you were, say, Thailand or Malaysia – reasonably successful middle-income countries, but relatively small, open economies – utilising overt money finance would be much more vulnerable to adverse market reactions.

Now, of course, Britain is an intermediate case: not a continental-scale economy like the US or eurozone, but a much bigger economy than Thailand or Malaysia. In Britain, the arguments relating to financial market reactions and expectations are not trivial.

JG: There’s a point in the book where you say that the fundamental reason why eurozone states have had to pay higher interest rates on their public debt than the UK or US is that the eurozone member states aren’t able to issue fiat money. If that’s right, then the markets have, to some degree, already been assuming that the UK and US would issue fiat money where necessary – implying that they think the taboo on using fiat money in the UK is less absolute than you do.

AT: It’s a good point. Let’s take Japan. Why does Japan have the lowest government bond yields in the world despite having a clearly unsustainable government debt-to-GDP ratio of 230 per cent, which is even higher than Greece’s? It’s because, at the end of the day, the markets know that these bonds, if necessary, will be bought by the Bank of Japan.

Do the markets think that they will be bought permanently or temporarily? Well they don’t need to be clear on that, since either way any individual bond is certain to be repaid in money. So you’re quite right that government bonds of the UK, the US or Japan are effectively considered risk-free in nominal terms (and I stress nominal rather than real terms) because they are underpinned by the fact that if there was ever a danger of default they’d be bought by the central bank.

Of course, that underpinning is not absolutely certain. There have been one or two examples in history of governments choosing to default, even on domestic debt, rather than to monetise. The last big one was the Russian government bond [GKO] default of 1998. So you can’t assume that there is absolutely zero nominal default risk on government bonds.

But on the whole, I think you’re right that the financial market occupies a somewhat paradoxical position. At one level, they tend to support the taboo against explicit monetisation. At another level, they treat the government bonds of the US or Japan as being risk-free in nominal terms because they are ultimately underpinned by the monetisation option. They take implicit assurance from an option that they hope will never be explicitly exercised, but which is there if necessary.

JG: Could we turn now to your proposals for how to avoid a future spiral of private debt creation? You set out a very wide range of answers: much tougher bank reserve requirements; constraints on borrowers such as higher LTV ratios; more use of publicly owned investment banks; shifting tax incentives to increase equity over debt; and grit in the system of international capital flows. Now, my overarching question about these is how they could be made politically acceptable, because convincing the world of technocrats and experts is one thing, but convincing the public is quite another.

I’d like to start with your proposals on inequality. You argue strongly that greater financial stability will only be possible if we see a reduction in inequalities of wealth and income. You call for those inequalities to be reduced, and you say that that will require more redistribution of income and wealth, whether through tax and public spending or through labour market intervention. You nod to ideas for a basic income, to increases in the minimum wage, and to Thomas Piketty’s global wealth tax. Do you think the UK government’s current approach on this front is sufficient?

AT: Well, they’ve done one thing which pleasantly surprised me: the increase in the minimum wage.

However, I do not think that all problems in human society are fixable. I’m a pragmatist rather than a utopian. We live in an environment where inequality has increased significantly for inherent technological reasons, and I think it would be very difficult to return to the levels of inequality of the 1950s. But when the wind is blowing very strongly in one direction, politically it’s sensible to lean at least some way in the other direction.

What are the tools? I would not have been against the increase in the top marginal tax rate to 50 per cent. I wouldn’t want it to go any higher, but I believe in progressive rates of taxation.

I would not be against a higher rate of taxation on residential property, although I think the specific proposals put forward by the Labour party at the election were too extreme. I don’t think it makes sense, having for years allowed council tax on big valuable London houses to stay at £3,000 or so, to suddenly say you’re going to tax them at £50,000. Tax policy should not involve sudden leaps from one extreme to another, and proposals to do so are bound to provoke strong opposition.

At the lower end of the income distribution, a combination of higher minimum wages and working tax credits is required – and I deliberately say a combination.

I was chairman of the Low Pay Commission [LPC] from 2002 to 2006, and over those four years we increased the minimum wage significantly more than average earnings. I think in fact we increased it by almost 30 per cent over four years, which is not far off what George Osborne has suggested for the next four. And I was surprised that, after I ceased to be chair, the LPC allowed the minimum wage to degrade a bit, rather than continuing to increase it at least in line with average earnings.

I have always thought we should explore how high we can push the minimum wage without producing significant job losses. Whether Osborne has got it right with the level that he wants should, however, be subject to careful analysis.

But an increase in the minimum wage cannot be instead of working family tax credits. We need both. There are degrees of freedom to increase the minimum wage without producing a serious unemployment effect – but those degrees of freedom are not absolute. And it’s almost certain that the minimum wage level that is compatible with full employment is too low to keep many people (depending on specific family circumstances) out of a reasonable definition of poverty.

So we’re only going to be able to deal with poverty by also having working tax credits. And when you put together both minimum wages and working tax credits, you’re not far off the philosophy that leads some people to ideas like a citizens’ income guarantee.

I am absolutely not a utopian socialist nor any other type of utopian. Nor am I a complete egalitarian by any means: I’ve always accepted that capitalist societies will have significant inequality, and that there is nothing inherently wrong with that. Nor do I think we have perfect instruments to tackle inequality. But somewhat more redistribution by a somewhat more progressive tax system at the top end, and the judicious combination of minimum wages and working tax credits – or a basic income – at the bottom end, are useful things that we can do to make things a bit better than they would otherwise be.

JG: Can you envisage a combination of such policies that will both be politically feasible and also sufficient to reduce the threat to financial stability that you say inequality poses?

AT: It will make life better, but it won’t make it perfect.

JG: My question is whether it will make it better enough to—

AT: I think it will make it better. We can do things to significantly mitigate the extremes of inequality, and I don’t think we are going to solve the problems of financial instability unless we do so. But I also say at one stage in the book, ‘Don’t imagine we can just solve this problem via believable policies on inequality. We also need tough financial regulations as well.’

JG: Another area where I wondered about the political feasibility of your proposals is around tax: you want to eliminate the bias in the tax system in favour of debt, especially leveraged real estate, through measures such as higher capital gains tax for housing and land value taxes.

Now, you note explicitly that politicians have tended to see this as simply too hard because the losers will shout too loud. How could that, in practice, be overcome? If you were advising politicians on the best path to putting these policies in place while still remaining elected, what would you suggest?

AT: Well, oddly enough, Osborne in his latest budget did do one thing which I had proposed – indeed which I suggested to some people in the Labour party as something they should espouse before the election, and to which I didn’t get a positive response – which was to reduce tax deductibility for buy-to-let investors, restricting it to the marginal rate. I think that is a perfectly sensible new policy, and it was unfortunate that others didn’t propose it.

As I said, I wouldn’t go all the way to a ‘mansion tax’, as was proposed before the election, but I think it would be possible to propose new and considerably higher bands for council tax, which would somewhat increase the progressivity. That would clearly be a better strategy than continuing to bump up stamp duty, which is an odd tax since it falls only on people who move house rather than those who stay put, a distinction with no clear merit in terms of either efficiency or equity.

So yes, I think one could imagine some progress towards greater progressivity, as long as one doesn’t go too far and stretch the political elastic to the point where people say ‘that’s unacceptable’. To be blunt, I think this is always the challenge for progressive politics: you can successfully propose making the tax system somewhat more progressive, but if you go too far you won’t get a more progressive tax system at all, because you won’t get elected.

On the tax deductibility of buy-to-let, I’d take it to the next stage and I’d remove it entirely. I think it is bizarre that we have no tax deductibility of interest for an individual with one mortgage on the house they’re living in, but we do have tax deductibility – even if now only at the standard rate – for a buy-to-let investor with 50 houses. That’s just very odd.

But the overall challenge here is basically politics and practicality rather than theory. I remember discussing this in early 2009 with John Lipsky, who was then the deputy managing director of the IMF. We were talking about the causes of the financial crisis and we agreed that ideally we should get rid of the tax deductibility of interest. But as John commented then, ‘Of course, that’s absolutely right and we’ve all agreed it for years. But one of these days we’ll have to decide whether this is something we say in our prayers to God in the evening or whether we actually expect it to be achieved on this earth.’

JG: Can we turn to the economics profession? You argue strongly that mainstream economics needs to do a number of things: abandon its over-generous assumptions of human rationality; create models that incorporate the financial sector; and, more generally, overcome its ‘physics envy’ – an excessive attraction to mathematical precision and a failure to acknowledge the inherent irreducible uncertainty of economic systems. How optimistic are you that any of this will happen?

AT: Since the crisis there have been some positive developments. There are now more economists in academia – and undergraduate students in groupings such as Rethinking Economics – who are willing to challenge the dominant pre-crisis neoclassical paradigm. And there are also, of course, many who were doing that before the crisis, such as George Akerlof or Robert Shiller, exploring the role of irrationality and animal spirits which can’t be captured in neoclassical models – and their work is rightly receiving increased attention.

There has also been a welcome revival of interest in the value of good empirical data. I think, for instance, that is Piketty’s great achievement: whether or not you agree with his theoretical and policy conclusions, he’s shown that simply setting out some extraordinarily arresting facts about wealth-to-income ratios raises major questions which the orthodoxy had simply not asked.

Finally, there’s a lot of good work on financial instability which is pushing the limits of the rational and mathematical model. I think here of the work of Markus Brunnermeier, Hyun Song Shin and others, who work somewhat within the established model framework but who also illustrate that even within that framework we should expect significant financial instability.

What is concerning, however, is that there is a tendency for many orthodox economists to assume that we can fix economics just with minor tweaks to the existing models – adding some equations to capture ‘financial frictions’, or adding a representative agent bank alongside the representative agent households and companies which populate dynamic stochastic general equilibrium models. The starting point is that we have many economists in academia who have achieved career progression by working within a highly mathematical, rational expectations-based orthodoxy, and they are very resistant to the radical changes required if economics is better to explain financial and macroeconomic instability.

So we are at a stage of the debate where it’s possible that the accumulating evidence of the inadequacy of the dominant orthodoxy could produce quite a major revolution in the way we do economics. But it is also possible that the dominant response could be little more than the equivalent of adding epicycles to a Ptolemaic model which still places the Earth at the centre of the universe.

Given the changes we need in the way economics is taught and practised, this is very much a glass half-empty and half-full.

JG: Do you think macroeconomics should give up the search for microfoundations, or keep trying?

AT: That is a very interesting question. I have tended to assume that what went wrong with modern macro was the result of a reasonable aspiration badly executed. That’s to say, the criticism of IS–LM type models – that they were macro models without microfoundations – was legitimate, but that sadly we then developed microfoundations based on the flawed proposition of rational expectations. So we ought now to build new and better microfoundations.

But I was intrigued recently to hear John Kay challenge that assumption, arguing that the whole proposition that macro can have comprehensive microfoundations is wrong because it’s almost, as it were, a category error. I’m not really sure what I now think about that – I need to ponder John’s argument a bit more. But at the very least I will stick to the point that what clearly went wrong was that the microfoundations we attempted to build were not only wrong but frankly rather silly. That was bound to be a project that didn’t work.

Overall, however, I think we should not aspire to replace the pre-crisis orthodoxy with a new orthodoxy or with any set of models purporting to the same certainty and completeness of the pre-crisis models. We should accept that economics is a social science and so we will always be dealing with insights and understandings which are partial, and we will always have to use many analytical techniques: some theoretical, some mathematical, some empirical, some from narrative economic history. The idea that we will ever have a single model which gives us the answer is something we need to move away from.

JG: I’d like to move onto a slightly more nebulous question, concerning culture. One feature that accompanied the explosion of private debt over the last few decades was reduced cultural aversion to debt. Debt has been seen less and less as a sin. Do you think we need to restore some of that cultural aversion?

AT: I don’t think economists should shy away from the role of culture – by which we mean the role of ideas, norms and language which influence people’s behaviour in a way which can never be captured in a rational model of rational choice and utility maximisation. For instance, I find it very difficult to understand why Germany has much lower consumer debt than the UK without reference to the idea that there is something cultural embedded in, presumably, what parents tell their children, what they hear at school, what the newspapers say, and that that generates a different attitude towards the question of what is the appropriate level of debt individuals should be willing to incur.

So certainly we should pay attention to the idea of culture – but also recognise that it is very difficult to change culture through explicit public policies. The determinants of culture are deep and complex, and highly path-dependent, so that once a society has gone down a certain cultural route, it’s incredibly difficult to retrace one’s steps.

It is difficult to change to a new route by deploying public policy levers. Having said that, there are some levers that we should and could use. Take, for instance, very high interest payday lending. I would never want to make it illegal – since illegal provision would be still worse – but we should certainly place tight constraints on its advertising, which is deliberately designed to encourage people into debt, and which can itself influence cultural attitudes to debt in a harmful fashion.

JG: We’ve taken a number of steps to revise policy since the 2008 crisis, particularly around stronger regulation of banks. Your book sets out many more things that we ought to do. If policies remain as they currently are – not how they were in 2008 but how they currently are – but we don’t take steps set out in your book, will financial crises continue to occur at the same frequency as they have in recent years? Or do you think we’ve successfully had some impact?

AT: The steps we have taken have significantly decreased the probability and the likely severity of financial crises – crises within the financial system itself. But they have left largely unresolved the fundamental problem of the reliance of modern economies on credit growth. So we may face continued severe macroeconomic instability or poor performance, even if we do not have such severe financial crises.

The distinction between macroeconomic instability and financial stability is important. For instance, in the late 1980s in Britain there was a credit and housing price boom followed by the mid-90s recession, but it did not provoke a financial crisis of the kind that required emergency action to save the banking system.

Since our latest crisis, we have taken actions which make financial crises, narrowly defined, considerably less likely – but I don’t think we’ve addressed the fundamental drivers of instability in monetary economies.

This article appears in edition 22.2 of Juncture, IPPR's quarterly journal of politics and ideas, published by Wiley.

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